National Orthopedics Co. issued 8% bonds, dated January 1, with a face amount of
ID: 2490098 • Letter: N
Question
National Orthopedics Co. issued 8% bonds, dated January 1, with a face amount of $550,000 on January 1, 2013. The bonds mature on December 31, 2016 (4 years). For bonds of similar risk and maturity the market yield was 10%. Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1. FVAD of $1 and PVAD of S1) (Use appropriate factor(s) from the tables provided.) Required: Determine the price of the bonds at January 1, 2013. Prepare the journal entry to record their issuance by National on January 1, 2013. (If no entry is required for a transaction, select "No journal entry required" in the first account field.) Journal Entry Worksheet Record the issuance of the bonds on January 1, 2013 January 01, 2013 Enter debits before creditExplanation / Answer
1.
Price of bond = Present value of annuity of interest payment + Present value of Principal
Present value of annuity factor (PVA) = {1-(1+r)-n}/n
Present value factor = (1+r)n
Semi-annual Interest payment = $550,000 * 8% * 1/2 = $22,000
n = 4 years * 2 = 8
r = 10%/2 = 5% = 0.05
Present value of annuity of interest payment = $22,000*(1-1.05-8)/0.05 = $22,000 * 6.4632 = $142,190.40
Present value of principal = $550,000/1.058 = $372,261.60
Price of bond = $142,190.40 + $372,261.60 = $514,452
Table values are based on:
n =
8
r =
0.05
Cash Flow
Amount
Present value
Interest
$ 22,000.00
$ 142,190.40
Principal
$ 550,000.00
$ 372,261.60
Price of bonds
$ 514,452.00
2.
Date
Account titles and explanation
Debit
Credit
January 1, 2013
Cash
$ 514,452
Discounts on issue of bonds
$ 35,548
Bonds payable
$ 550,000
3.
Semi-annual Interest Period-End
Cash Interest
Bond Interest Expense
Discount amortization
Carrying value
($550,000*8%*1/2)
(Carrying value*10%*1/2)
(Bond interest - Cash Interest)
(Carrying value + Discount amortization)
01-01-2013
$ 514,452
30-06-2013
$ 22,000
$ 25,723
$ 3,723
$ 518,175
31-12-2013
$ 22,000
$ 25,909
$ 3,909
$ 522,083
30-06-2014
$ 22,000
$ 26,104
$ 4,104
$ 526,187
31-12-2014
$ 22,000
$ 26,309
$ 4,309
$ 530,497
30-06-2015
$ 22,000
$ 26,525
$ 4,525
$ 535,022
31-12-2015
$ 22,000
$ 26,751
$ 4,751
$ 539,773
30-06-2016
$ 22,000
$ 26,989
$ 4,989
$ 544,761
31-12-2016
$ 22,000
$ 27,238
$ 5,238
$ 550,000
Total
$ 176,000
$ 211,548
$ 35,548
4.
Date
Account titles and explanation
Debit
Credit
June 30, 2013
Interest expense
$ 25,723
Cash
$ 22,000
Discounts on issue of bonds
$ 3,723
5.
Date
Account titles and explanation
Debit
Credit
December 31, 2016
Interest expense
$ 27,238
Cash
$ 22,000
Discounts on issue of bonds
$ 5,238
December 31, 2016
Bonds payable
$ 550,000
Cash
$ 550,000
Table values are based on:
n =
8
r =
0.05
Cash Flow
Amount
Present value
Interest
$ 22,000.00
$ 142,190.40
Principal
$ 550,000.00
$ 372,261.60
Price of bonds
$ 514,452.00
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